Gold Stocks Shine in 2017

The gold miners' stocks are rocketing higher again after suffering a rough
few months. Following sharp selloffs on gold-futures stops being run, the Trumphoria
stock-market surge, and a more-hawkish-than-expected Fed, this battered sector
had largely been left for dead. But gold stocks' strong fundamentals finally
overcame the dismal herd sentiment last week, paving the way for this sector
to shine again in 2017.

Thus no sector has been more out of favor in recent months than precious metals.
Gold and therefore gold-stock bearishness abounded, with bullish outlooks dwindling
near nonexistent. But viewing gold stocks solely through the extremely-distorted
post-election lens is a serious mistake. Despite their sharp Q4 selloffs, this
sector as measured by the HUI led the markets by still soaring 64.0% higher in
full-year 2016!

If any other sector like technology or financials or even energy had seen
such dominating performance last year, the financial media would be endlessly
extolling it. But not gold, it's just too contrarian. 2016 was a solid year
for gold, with its 8.5% rally nearly catching the S&P 500's 9.5%. As of
Election Day, gold was still up 20.3% year-to-date which trounced the 4.7%
of the S&P 500. Gold really did shine last year!

The highlight of gold's first up year since 2012 was certainly the first half.
Between a 6.1-year secular low in mid-December 2015 on highly-irrational
Fed-rate-hike fears and early July, gold powered 29.9% higher in its first
bull market since 2011. And over roughly that same 6.5-month span, that leading
HUI gold-stock index soared 182.2% higher! Gold stocks' stellar performances dominated the
markets last year.

Nearly a year ago as the HUI fell to miserable 13.5-year secular lows, I advised
that a major new gold-stock bull was imminent. Last January's gold-stock prices
were fundamentally
absurd relative to this sector's underlying earnings power even at then-prevailing
gold prices. A similar extreme sentiment-distorted pricing anomaly just happened last
month. So 2017's gold-stock setup is just as bullish as 2016's proved!

Sadly most traders succumbed to the recent groupthink bearishness to foolishly
bury their heads in the sand regarding gold stocks. The same thing happened
a year ago. Speculators and investors alike are always ignoring the most-beaten-down
sectors which usually have the greatest upside potential. So it's incredibly
important to get up to speed on gold stocks as 2017 dawns, before they are
bid far higher again!

Maintaining perspective is the key to overcoming the dangerous herd emotions
of greed and fear. They convince traders to wrongly buy high and sell low,
ultimately leading to catastrophic losses. But armed with the big picture,
it is much harder to fall into the trap of extrapolating recent performance
out into the indefinite future. This first chart looks at the gold-stock bull
over the past year rendered in HUI terms.

After nearly tripling in just over a half-year by early August, the
red-hot gold stocks were indeed due for a serious correction as I warned
in July. Infected with rampant greed and wildly overbought, this sector
soon sold off hard in August. Sharp corrections in bull markets are totally
normal and very healthy, as they bleed away excessive greed to keep sentiment
balanced. After that gold stocks stabilized in September.

But as October dawned, an anomalous adverse event slammed them out of the
blue. The gold-futures speculators who dominate short-term gold trading must
deploy stop losses to protect themselves from these hyper-leveraged trades.
They had a big mass of stops set near $1300, which had proven strong support
for gold since it soared in late June on that Brexit-vote surprise. That was
a logical level to protect capital.

After drifting lower in late September, gold finally slipped into that futures-stop-infested
zone around $1300 in early October. The consequential stops triggering soon
cascaded, and gold's sharp selloff became self-feeding. The resulting
mass stopping quickly spilled into gold stocks, causing the HUI to plummet
10.1% on October 4th! While painful, that surprise event was an extreme
anomaly that wasn't sustainable.

Indeed gold stocks soon stabilized again, with buyers returning near their
key 200-day moving average and parallel bull-market-uptrend support in October.
Gold and its miners stocks climbed on balance right into election night, when
they soared in futures and overseas trading as Trump took the lead in Florida.
All pre-election market behavior strongly suggested gold would surge if
Trump somehow managed to win.

American gold futures blasted 4.8% higher from that afternoon's close on election
night, hitting $1337. And over in Australia gold stocks were soaring 15%+!
But later that very night as Clinton conceded to virtually eliminate the risk
of a contested election, the US stock markets started to rally sharply out
of limit-down 5% S&P-500-futures losses. And as the anti-stock trade,
gold was hammered on that stunning reversal.

As gold dropped in the days after the election surprise on the Trumphoria
stock-market rally, the gold stocks were blitzed again with another mass stopping.
On November 10th and 11th, the HUI plummeted 7.8% and 8.0%! These horrific
losses were the final straw for most gold-stock investors, destroying their
will to remain in such a volatile sector. So gold stocks went from loved in
mid-2016 to despised in mid-November.

But again perspective is crucial. How often does a radical outsider like Trump
run for and actually win the US presidency? Nothing like that has ever happened
before. Any market selloff driven by an extreme anomaly is never sustainable.
Gold stocks didn't plunge because their fundamentals were failing, but because
an epic surprise post-election stock-market rally seduced investors out of
gold back into lofty stocks.

Again since that extreme gold-stock selloff was purely sentimental and
had nothing to do with the hard fundamental realities of the gold-mining industry,
these battered stocks quickly stabilized. Despite the stock-market euphoria
and resulting gold antipathy, the HUI ground sideways for an entire month from
mid-November to mid-December. The unjustified extreme gold-stock selling had
largely exhausted itself.

But on December 14th, the Fed surprised
on the hawkish side so gold and gold stocks took another hit. While traders
had universally expected the Fed to hike rates for the second time in 10.5
years, they did not expect elite Fed officials to forecast three more
rate hikes in 2017 instead of two previously. So yet again gold stocks
were crushed in emotional fear-drenched selling, ultimately pummeling the
HUI to 163.5.

Those were essentially February levels, last seen on the first trading day
of March. While that post-Fed selloff wasn't an extreme anomaly like the early-October
and post-election ones, it was devastating to already-tattered gold-stock psychology.
An astonishing 2/3rds of gold stocks' bull market in the first half
of 2016 had been erased! The gold miners were universally hated, the pariahs
of the investment world.

But that didn't make any sense at all. As of its very closing low the day
after last month's Fed decision, the gold stocks as measured by the HUI were
still up a fantastic 47.0% year-to-date! That compares to just 10.7% for the
S&P 500, and this sector likely remained the top performer in 2016.
In any other sector in all the stock markets, traders would be salivating at
buying the dip after such a supremely-anomalous selloff.

Instead of fretting about a 42.5% drop over 4.4 months largely driven by two
unrepeatable events, traders should've been remembering gold stocks' powerful
first-half gains. Back in July and August when the gold stocks were high, investors
and speculators alike were falling all over themselves to deploy capital to
chase gains. But they were nowhere to be found when these miners' stocks plunged
to fire-sale prices.

I can't help but marvel at this glaring disconnect. I've spent decades actively
speculating in the stock markets, and have shared our contrarian research via
my financial-newsletter business for 17 years now. The most-shocking revelation
I've learned is how susceptible to groupthink psychology the vast majority
of investors and speculators are. They love to buy high when greed reigns,
but refuse to buy low as fear mounts!

Last summer traders were eagerly rushing to buy gold stocks high, to chase
the strong gold-stock gains. Yet just a few months later when these very-same
elite gold miners were deeply on sale for 40%+ off, these same traders who
loved them last summer wanted nothing to do with them. What is so hard to understand
about buying low and selling high? Buying low means embracing fear when
few others will buy.

Fully wrapped up in popular bearish sentiment, traders totally lost sight
of the gold-stock fundamentals in much of November and December. I
did my best to help them overcome that, spending long weeks in late November
and early December digging deeply into hard gold-mining fundamental data from
these companies' just-published third-quarter financial reports. Yet that super-important
research fell on deaf ears.

I dug deeply into the top 34 component companies of each of the dominant gold-stock
ETFs, the GDX VanEck Vectors Gold Miners ETF and the GDXJ VanEck Vectors Junior
Gold Miners ETF. It turned out in Q3'16 these elite GDX
major gold miners reported average all-in sustaining costs of $855 per
ounce. And the elite GDXJ
junior gold miners weren't much worse at $911 per ounce. These numbers
are crucial.

All-in sustaining costs reveal what it costs the gold miners, individually
or as an industry, to maintain and replenish their current operations. Between
Election Day and year-end, the gold price averaged $1177 per ounce. Extending
to all of the dismal Q4'16, that climbed to $1218. And even at worst after
the Fed decision, gold only briefly fell to $1128. None of these gold levels
were remotely close to threatening $855!

Even on gold's worst day in Q4, the elite gold miners of GDX were still earning
big profits of $273 per ounce. That equates to an amazing 24% profit margin
that most industries would sell their souls for. At the Q4 average gold price,
these earnings were fully a third higher at $363 per ounce! Yet the
irrational fear was so great that gold stocks were battered back to prices
first seen in July 2003 when gold traded near $360.

Stop and think about that for a second. Just a couple weeks ago, in a quarter
where the gold miners likely earned $363 per ounce mined after all expenses,
their stock prices were trading at levels first seen 13.4 years earlier when the
entire gold price was less than current profits! The only words that come
to mind to describe this are ridiculous, ludicrous, and absurd. The recent
gold-stock prices weren't righteous.

For 7 weeks in a row I wrote comprehensive
essays explaining this extreme gold-stock anomaly, and thus what radical
upside the gold stocks had. As always I put my money where my mouth was,
buying and recommending 8 new specific gold-stock and silver-stock trades
on December 20th and 4 more on December 27th to the subscribers of our weekly Zeal
Speculator newsletter. We also added new call options.

On December 31st I extended the buy recommendations to our monthly Zeal
Intelligence newsletter with 5 new gold-stock and silver-stock trades.
The incredible opportunities in these beaten-down gold stocks trading at
fundamentally-absurd prices were explained in depth in real-time to
our subscribers as they happened. Prudent contrarian traders who listened
instead of ostriching are now making out like bandits.

Being so close to year-end, I didn't expect the new investment buying to flood
into gold stocks until the new year. But it's always important to get deployed before
everyone else catches on, as that's when the buy-low opportunities are
the greatest. And out of the blue on no news, gold stocks started rallying
on the day before the long Christmas weekend. That strong contrarian buying
persisted for most of last week.

And as 2017 dawned this week, investors immediately started looking for deeply-undervalued
sectors to position in for this new year. And the still-beaten-down but-quickly-recovering
gold stocks won a sizable portion of those capital inflows despite their tough
fourth quarter. As of the middle of this week, in less than 3 weeks since its
extreme post-Fed low the HUI has already catapulted an amazing 17.6% higher!

As always the stocks of the smaller gold and silver miners with superior fundamentals
we specialize in enjoyed gains amplifying those seen in the major miners dominating
the HUI and GDX. And despite the sharp rebound gold stocks have seen in recent
weeks, they are just getting started. Odds are this sector will once
again prove one of if not the best-performing sector in all of 2017, building
on 2016's strong gains.

As of the Wednesday data cutoff for this essay, the HUI was still only trading
at 192.3. That merely took it back to levels seen in the immediate post-election
plunge. The gold stocks still remain well below their strong 200dma and bull-market-uptrend
support zones, and 32.3% under their early-August bull-market high per the
HUI. The gold stocks' upside potential from here remains vast, as evidenced
on all fronts.

In addition to battered technicals, gold-stock sentiment was crushed to hyper-bearish
levels late last year. It will take a long time and a lot of rallying to eradicate
that excessive fear and restore sentiment balance to this sector. And fundamentally,
gold stocks remain wildly undervalued relative to the profits they can
spin off at prevailing gold prices. A quick proxy for that is the HUI/Gold
Ratio, rendered here.

I've often discussed this chart extensively in the past, including nearly
a year ago when calling
a new gold-stock bull the very week 13.5-year HUI lows were witnessed.
In a nutshell, the HUI/Gold Ratio distills the key fundamental relationship
between gold prices, gold-mining profits, and therefore gold-stock price levels
into a single line. Gold-stock prices tend to trade in a range relative to
underlying gold levels.

On the day after the Fed's hawkish surprise last month, the HGR fell to 0.145x.
In other words, the HUI closed at 14.5% of gold's close. Outside of the extreme
record HGR anomalies seen in the last half of 2015, that was among the lowest
HGR levels ever. Back in mid-January 2016, the HGR briefly fell to an all-time
low of 0.093x. But such crazy lows are unsustainable sentiment-driven anomalies,
temporary distortions.

As of the middle of this week, the HGR has still only recovered to 0.165x.
From 2009 to 2012, which were the last normal years between 2008's stock panic
and 2013 when the Fed's radical QE3 started to levitate
the stock markets and crush gold, the HGR averaged 0.346x. So merely to
mean revert back up to normal levels relative to today's prevailing gold prices,
the HUI still needs to rally another 109% from here!

But that's far too conservative for a couple major reasons. All mean reversions
out of extremes tend to overshoot proportionally in the opposite direction.
So the abnormally-low HGR levels in recent years driven by extreme fear will
almost certainly yield to abnormally-high levels in coming years fueled by
excessive greed. A proportional overshoot yields a topping HGR target of 0.599x,
for another 262% HUI rally.

As gold mean reverts higher, gold-mining profits greatly leverage
and amplify its gains. Gold-mining costs are largely fixed when
mines are planned. That's when engineers decide which ore bodies to mine,
how to dig to them, and how to process that ore. This determines how much
capital investment is necessary to bring mines online, huge fixed costs.
After that, variable operating costs don't fluctuate too much.

Plugging higher gold prices into any HGR target, either an unlikely strict
mean reversion or a very-likely proportional overshoot, yields commensurately
higher gold-stock price targets. The math is simple. Take any gold level you
find likely in the coming years, multiply it by 0.346x or 0.599x, and you get
the HUI levels that can support. The battered gold stocks are likely only just
starting a mighty new multi-year bull market!

You can certainly ride the coming massive gold-stock gains in those leading
GDX and GDXJ gold-stock ETFs. But at best they will mirror sector gains, as
they are over-diversified and
held back by too many underperforming gold stocks with inferior fundamentals.
A carefully-handpicked portfolio of elite gold and silver miners with superior
fundamentals will see gains dwarfing those of the gold-stock ETFs and indexes.

At Zeal we've literally spent tens of thousands of hours researching
individual gold stocks and markets, so we can better decide what to trade and
when. As of the end of Q3, this has resulted in 851 stock trades recommended
in real-time to our newsletter subscribers since 2001. Fighting the crowd to
buy low and sell high is very profitable, as all these trades averaged stellar
annualized realized gains of +24.1%!

In order to reap success like this, you have to stay informed all the time.
You can't abandon gold stocks when they are weak and out of favor, as that
is when the greatest buying opportunities arise. An easy way to stay abreast
is through our acclaimed weekly and monthly newsletters.
They draw on our vast experience, knowledge, wisdom, and ongoing research to
explain what's going on in the markets, why, and how to trade them with specific
stocks. For only $10 per issue, you can learn to think, trade, and thrive like
a contrarian. Subscribe today,
and deploy in our new stock trades before they power far higher!

The bottom line is gold stocks are really set to shine in 2017, as early trading
is already proving. This sector was just battered to fundamentally-absurd price
levels in the wake of the election surprise. With gold-mining earnings remaining
strong, the recent gold-stock lows were fully driven by extreme bearish sentiment.
Such fear anomalies never last, always paving the way for massive mean reversions
higher.

The latest one has already started, and gold stocks still have easy potential
to at least double from here even at low prevailing gold prices. But as the
overbought stock markets and US dollar inevitably reverse lower this year,
gold's own bull will resume. Higher gold prices will greatly increase the profitability
of gold mining, and fuel a major new multi-year gold-stock bull. As always
the early investors will earn fortunes.

If you have questions I would be more than happy to address
them through my private consulting business. Please visit www.zealllc.com/financial.htm for
more information.

Thoughts, comments, flames, letter-bombs? Fire away at zelotes@zealllc.com.
Due to my staggering and perpetually increasing e-mail load, I regret that
I am not able to respond to comments personally. I WILL read all messages though,
and really appreciate your feedback!

Mr. Hamilton, a private investor and contrarian analyst,
publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis
of markets, geopolitics, economics, finance, and investing delivered from an
explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for
more information, www.zealllc.com/samples.htm for a free sample, and www.zealllc.com/subscribe.htm to
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